The financial crisis has proved to be a resounding comeback for the International Monetary Fund (IMF), as it appears to have shed the ideological orthodoxy it was often accused of. But the danger remains that, as the world moves past the crisis into a recovery, it will have swapped one kind of orthodoxy for another.
That IMF has changed is evident to its harshest critics. Nobel Prize winner Joseph Stiglitz, long IMF’s bête noire, told The Wall Street Journal last weekend that he welcomes the changes. Earlier this decade, IMF’s insistence on higher interest rates, balanced budgets and capital account liberalization worsened the 1997 East Asian crisis. Now, IMF is recommending deficit spending and monetary easing: A recent report even challenged the pre-crisis consensus that central banks should solely target inflation.
This weekend, IMF also noted the beginning of an “Access to Finance Project” which, aiming at collecting data on consumer financial services, stresses financial inclusion. That idea has long been key for pro-poor policies in India. It suits a developing country such as ours fine; but for an institution for years preaching policies or imposing conditions (in exchange for loans) that have been perceived as anti-poor—mass privatization, fiscal austerity—this is quite a turnaround in image.
In its earlier image, IMF was the bat the West used to beat orthodox free-market sense into developing countries. But now that this “Washington Consensus” is crumbling, IMF is changing tracks. Then again, officials may have been already responding—before the crisis—to the way the institution was being marginalized earlier this decade.
Let’s hope IMF’s changes come of its own rethinking, and are not a case of jumping ship with changing circumstances. Consider that IMF was designed in a more Keynesian world of fixed exchange rates and fiscal interventions: When both of these collapsed in the 1970s, IMF appeared to embrace monetarism, the free-market theory that money supply changes can prevent downturns. And, currently under a left-leaning leadership, it’s come back to the now-fashionable Keynesianism.
If it’s following the zeitgeist, IMF shouldn’t be lured into over-selling the Keynesian dose of fiscal pump priming and cheap credit, especially if it engenders the next crisis. In that event, it had better start searching for a new ship to jump to.
IMF’s policy changes: convenient or genuine? Tell us at firstname.lastname@example.org